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Tuesday, 3 July 2012

It is well-known that speaking of used software is the secret to a successful date

Dear IPKat readers,

This is my first post as a guest Kat, and I am indeed looking forward to these months together.

The story I would like to start with may not be the most intriguing to
tell, unless you believe that there is something sexy in the resale of
downloaded software.

Apparently this is what the Court of Justice of the European Union
believed, when this morning delivered its 89-paragraph judgment in Case 128/11 UsedSoft v Oracle, on which Advocate
General Bot had given his Opinion a few months ago (see earlier posts here and here).

Background and questions referred

As is well-known, Oracle has not only been busy in various courts recently (eg with the Oracle v Google saga),
but is also a software house, which develops and markets computer software. In
85% of cases, Oracle distributes its software by download directly from its own website.

The user right in those programs includes the right to store the software permanently on a server and to allow a number of users to access it by downloading the software to the main memory of their workstation. On the basis of a software maintenance agreement, updated versions of the software and programs for correcting faults (patches) can be downloaded from Oracle's website.

Oracle's licence agreements include, among the other things, the following proviso:

With
the payment for services you receive, exclusively for your internal business
purposes and for an unlimited period, a non-exclusive, non-transferable
user right, free of charge, in respect of everything which Oracle develops and
makes available to you on the basis of this agreement.

UsedSoft, as the name suggests, trades in used
software licences. In 2005 it started offering used Oracle licences, stating
that they were current in the sense that the maintenance agreement concluded
between the initial licence holder and Oracle was still in force and that the
legality of the sale was confirmed by a notarial certificate.

Customers who were not yet in possession of
the Oracle software concerned, downloaded the software directly from Oracle’s
website after acquiring the ‘used’ licences, while those who already had the
software and wished to purchase licences for additional users (Oracle allowed a maximum of 25 users per licence) downloaded the
software to the main memory of the workstations of those additional users.

Oracle was not particularly happy with this
state of affairs. So it sought and obtained an injunction from the Landgericht
München I (Regional Court, Munich I) to prevent the continuation of these
practices. Following the dismissal of the appeal lodged by UsedSoft against
that decision, UsedSoft lodged with the
Bundesgerichtshof (Federal Court, Germany).

According to the Bundesgerichtshof, the actions of
UsedSoft and its customers infringed Oracle’s exclusive right of permanent or
temporary reproduction of computer programs within the meaning of Article
4(1)(a) of Directive 2009/24 (this is the codified version of the Software
Directive). However, the
Court decided to stay the
proceedings and referred three questions to the CJEU:

(1) Is the person who can
rely on exhaustion of the right to distribute a copy of a computer program a
“lawful acquirer” within the meaning of Article 5(1) of Directive 2009/24 …?[“In the absence of specific contractual
provisions, [most infringing acts, such as reproduction, translation,
adaptation, and arrangement] shall not require authorisation by the rightholder
where they are necessary for the use of the computer program by the lawful
acquirer in accordance with its intended purpose, including for error
correction.”]

(2) If the reply to the
first question is in the affirmative: is the right to distribute a copy of a
computer program exhausted in accordance with Article 4(2) of Directive 2009/24[“The first sale in the Community of a copy
of a program by the rightholder or with his consent shall exhaust the
distribution right within the Community of that copy, with the exception of the
right to control further rental of the program or a copy thereof.”]… when the acquirer has made the copy with
the rightholder’s consent by downloading the program from the internet onto a
data carrier?

It was rather exhausting for Henry to understand the questions referred by the Bundesgerichtshof ...

(3) If the reply to the
second question is also in the affirmative: can a person who has acquired a
“used” software licence for generating a program copy as “lawful acquirer”
under Article 5(1) and Article 4(2) of Directive 2009/24 … also rely on exhaustion
of the right to distribute the copy of the computer program made by the first
acquirer with the rightholder’s consent by downloading the program from the
internet onto a data carrier if the first acquirer has erased his program copy
or no longer uses it?

The
response of the CJEU

Question
2 – Exhaustion of the right of distribution

Following an explanation of
the rationale underlying Article 5(1) (to safeguard the exhaustion of the distribution right under
Article 4(2)), the CJEU decided to address the second question first. This concerned whether and under what conditions the downloading from the internet of a copy
of a computer program, authorised by the copyright holder, can give rise to
exhaustion of the right of distribution of that copy in the EU within the meaning of Article 4(2) of Directive 2009/24.

Wishing to praise the usual clarity of EU law provisions, the Court observed that “there are several possible
interpretations” of Article 4(2).

As a
first option, Article 4(2) could be interpreted
as attaching the legal consequence of exhaustion of the distribution right to
the first sale of a copy of the
program and not necessarily
presupposing the putting into circulation of a physical copy of the program.

Alternatively, Article 4(2) could be applicable by
analogy in the case of the sale of a computer program by means of online
transmission. This would be because of an unintended lacuna in the Directive,
which does not regulate or contemplate online transmission of computer
programs.

A third interpretation would be in the sense to make
Article 4(2) inapplicable, in that the exhaustion of the distribution right
under that provision always presupposes the putting into circulation of a
physical copy of the program by the rightholder or with his consent. In other
words, the authors of the Directive deliberately refrained from extending the
rule on exhaustion to the online transmission of computer programs.

This said, the Court found that, in order to determine whether the copyright holder’s
distribution right is exhausted, it must be ascertained first whether the
contractual relationship between the rightholder and its customer may be
regarded as a "first sale … of a copy of
a program" within the meaning of Article 4(2).

... But to Bertrand the questions looked extremelyeasy, being a streetwise downloader of usedsoftware

Observing that the term ‘sale’ in Article 4(2) must be
regarded as designating an autonomous concept of EU law to be interpreted in a
uniform manner throughout the EU, the Court relied upon a commonly accepted and (as was also suggested by AG Bot) necessarily broad definition of it as “an agreement by which a person, in return
for payment, transfers to another person his rights of ownership in an item of
tangible or intangible property belonging to him.” As a consequence,

the commercial transaction giving rise, in accordance
with Article 4(2) of Directive 2009/24, to exhaustion of the right of
distribution of a copy of a computer program must involve a transfer of the
right of ownership in that copy.

According to the Court, this is what happened in
relation to the downloading of Oracle’s computer programs from the software
house’s website. Indeed,

It makes no difference, in a situation such as that at
issue in the main proceedings, whether the copy of the computer program was
made available to the customer by the rightholder concerned by means of a
download from the rightholder’s website or by means of a material medium such
as a CD-ROM or DVD. Even if, in the latter case too, the rightholder formally
separates the customer’s right to use the copy of the program supplied from the
operation of transferring the copy of the program to the customer on a material
medium, the operation of downloading from that medium a copy of the computer
program and that of concluding a licence agreement remain inseparable from the
point of view of the acquirer …

According to the Court, to limit the application of the principle of the
exhaustion under Article 4(2) solely to copies that are sold on a material
medium would allow the copyright holder to control the resale of copies
downloaded from the internet and to demand further remuneration on the occasion
of each new sale, even though the first sale of the copy had already enabled
the rightholder to obtain an appropriate remuneration. Such a restriction of
the resale of copies of computer programs downloaded from the internet would go
beyond what is necessary to safeguard the specific subject-matter of the
intellectual property concerned.

Furthermore, considering the conclusion of a maintenance agreement aimed
at patching and updating the copy originally purchased, the exhaustion of the
distribution right under Article 4(2) of Directive 2009/24 extends to the copy
of the computer program sold as corrected and updated by the copyright holder.

In any case, however, if the licence acquired by the first acquirer
relates to a greater number of users than he needs, the acquirer is not
authorised by the effect of the exhaustion of the distribution right under
Article 4(2) of Directive 2009/24 to divide the licence and resell only the user
right for the computer program concerned corresponding to a number of users
determined by him.

According to the Court,

The judges of the CJEU turned into oracles to address exhaustion issues

An
original acquirer who resells a tangible or intangible copy of a computer
program for which the copyright holder’s right of distribution is exhausted in
accordance with Article 4(2) of Directive 2009/24 must, in order to avoid
infringing the exclusive right of reproduction of a computer program which
belongs to its author, laid down in Article 4(1)(a) of Directive 2009/24, make
his own copy unusable at the time of its resale … Moreover, even if an acquirer
of additional user rights for the computer program concerned did not carry out
a new installation – and hence a new reproduction – of the program on a server
belonging to him, the effect of the exhaustion of the distribution right under
Article 4(2) of Directive 2009/24 would in any event not extend to such user
rights. In such a case the acquisition of additional user rights does not
relate to the copy for which the distribution right was exhausted at the time
of that transaction. On the contrary, it is intended solely to make it possible
to extend the number of users of the copy which the acquirer of additional
rights has himself already installed on his server.

Questions 1 and 3 – Notion of ‘lawful
acquirer’

By its first and third questions the referring court
wished essentially to know whether, and under what conditions, an acquirer of
used licences for computer programs may, as a result of the exhaustion of the
distribution right under Article 4(2), be regarded as a ‘lawful acquirer’
within the meaning of Article 5(1) of Directive 2009/24 who, in accordance with
that provision, enjoys the right of reproduction of the program concerned in
order to enable him to use the program in accordance with its intended purpose.

Following the response provided to Question 2, the
Court held that, since the copyright holder cannot object to the resale of
a copy of a computer program for which that rightholder’s distribution right is
exhausted, a second acquirer of that copy and any subsequent
acquirer are ‘lawful acquirers’ of it.

A sound judgment ... with some dark shadows

The judgment of the Court looks pretty sensible. In particular, it would
have been fairly unreasonable to distinguish the situation in which the copy of a computer program is made available by
means of a download from the rightholder’s website from that in which the copy
is provided through a material medium such as a CD-ROM or DVD, also in consideration of current commercial practices and users' habits.In any case, the Court did not interpret the principle of exhaustion in too a radical (pro-competitive?) manner. In particular, it is likely that controversy arises in relation to the part of the ruling in which the Court made it clear that the first purchaser of a licence is not authorised by the effect of the exhaustion of the distribution right to subsequently divide the licence he has acquired.

9 comments:

The Court has made clear that online transactions can be considered as fully-fledged transfers of ownership even when they are dressed up as "services" agreements. It will be interesting to see whether the same applies to subject matter other than computer programs. The Copyright Directive does not seem to preclude this reading when it says "The question of exhaustion does not arise in the case of services and on-line services in particular." (Rec. 35)

And now we arrived at diversity of the national systems once again. Copyright Act, Bulgaria: Art.18a (1) The first sale or other transfer of ownership in the original of the work or a copy thereof by the right owner or with his consent on the territory of [EEA]shall terminate the distribution right regarding the work or copies thereof with the exception of the right to authorize further rental....(3) The provision of paragraph 1 shall not refer to transmission of originals of thework or copies thereof in a digital form with regard to material copies of the work made by the user with the consent of the right owner.

This is a really interesting first post. Could I make one small request though, which is for a one-line executive summary of the implications of the judgement, for those of us who only sometimes have time to skim read IPKat posts? Thanks!

I just want to clarify the point on dividing licences and distinguish against other software vendors as I have read various articles and there is confusion of this point: “the first purchaser of a licence is not authorised by the effect of the exhaustion of the distribution right to subsequently divide the licence he has acquired”, which specifically refers to an Oracle ‘licence’ block of 25 CALs. This does not mean that Microsoft Volume Licence Agreements cannot be broken down eg: Select / Enterprise (an LA containing 1000 x Office 2010 can be sold off in parts). However, you cannot break down the Office 2010 PRO and sell off as Word, Excel, PowerPoint, Access etc. The closest Microsoft example to the Oracle ruling is the old Windows SBS blocks of 5 or 20, which you cannot break down and sell off.

In any case, this court ruling puts a massive dent in the FUD (Fear, Uncertainty & Doubt) tactics employed by the software vendors. However, worth noting that Usedsoft's use of a ‘Notary’ (in part, to hide where the licences came from) was deemed illegal by the German courts and Usedsoft is now also going through insolvency proceedings. There are other secondary software licence suppliers whom adopt more transparent business models that do not rely on the Exhaustion Principle eg: www.Discount-Licensing.com.

Info-Directive: "(29) The question of exhaustion does not arise in the case of services and on-line services in particular. This also applies with regard to a material copy of a work or other subject-matter made by a user of such a service with the consent of the rightholder. Therefore, the same applies to rental and lending of the original and copies of works or other subject-matter which are services by nature. Unlike CD-ROM or CD-I, where the intellectual property is incorporated in a material medium, namely an item of goods, every on-line service is in fact an act which should be subject to authorisation where the copyright or related right so provides."The Software Directive is not autonomous.Court: "Sell a license"? Some systems do not allow transfer of copyright yet assignment only.

"Observing that the term ‘sale’ in Article 4(2) must be regarded as designating an autonomous concept of EU law to be interpreted in a uniform manner throughout the EU, the Court relied upon a commonly accepted and (as was also suggested by AG Bot) necessarily broad definition of it as “an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.”"

Mmmm... this seems to raise questions of national property law, despite the above comment.

Even if we accept the statement quoted above, in what sense can you "own" a licence, when it is merely a contractual right and not an "item of intangible property" (under English law, at least)? You can own the underlying "intangible property" in the copyright, but not in the licence itself.

More fundamentally, the legal principle of exhaustion of rights (whether under national or EU law) is murky and unclear. It was a bad idea for EU software copyright law to dabble in some areas of contractual relationships (rather than just stick to IP issues) but not others. It looked odd at the time of the original software directive and looks even odder now. There is no intellectual coherence in legislating for exhaustion of rights in one very specific factual situation, ie resale of a copy of a software product. If this is appropriate for software, why not for diagnostic kits, which are often accompanied by limited label licences?

If the terms of the license agreement providing that the licence is not transferable may be overridden by the courts, what about licences reqiring an annual payment? If I stop paying, am I entitled to "sell" the software to a third party for their use? Or even, am I entitled to continue using the software?

Mark - when you "buy" a piece of software then, as well as possibly getting a physical disc or whatever, you also get the right to use the software at least to some extent. You can't copy it for your friends, and you don't own the copyright, but you can use it on your computer which involves copies being made. The seller is not allowed to simply say "Sucker!", withdraw his permission and sue you for copyright infringement while still keeping your money. So in this sense, you "own" the right to use the software. If you're a company with an imaginative accountant, you might even show this right in your accounts as an asset, seeing as it cost you money and it is presumably worth more money to you than the purchase price (otherwise you wouldn't have bought it in the first place).